Shine Light on Third-Party Litigation Funding of US Patents

Competition between nations is now most often waged in a boardroom or a courtroom. As economic prosperity and national security become increasingly dependent on technological superiority, complex legal fights over intellectual property have widespread consequences. US competitors like China are committed to developing intellectual property superiority, and I fear that US institutions are not prepared to address new threats.

Sometimes, the simplest solutions are the best response to complex problems. To protect against litigation investment entities weaponizing patent lawsuits in US courts, the old maxim that sunlight is the best disinfectant is a good place to start.

While Chairman of the Senate Subcommittee on Intellectual Property, I co-sponsored the Pride in Patent Ownership Act, designed to make the US patent system more transparent. Its principles were simple and bipartisan. When the government grants exclusive rights by issuing a patent, the public should know who owns it. The act would have required that whenever a patent changed hands, ownership information would be reported and be publicly accessible.

Transparency is particularly important, as more than half of US patents are issued to foreign entities and we have no record of when or to whom they are transferred. This is a national security and economic risk.

At the time, I noted that public access to who owns patents is critical because those accused of patent infringement shouldn’t have to undergo expensive litigation to discover who their accuser is. As big a problem as this is, who owns a patent on paper is increasingly only half of the story.

Litigation investors have entered the intellectual property space in droves. They include groups like private equity funds that weaponize lawsuits as an investment strategy. These investors own or create shell companies that extract payments through legal action. A subset of these investors, third-party litigation funders, offer the cash needed for plaintiffs to bring lawsuits, in return for a share of any profit.

Litigation funders have $13.5 billion in assets under management in the US and, due to the potential for massive verdicts, they have zeroed in on patent litigation. Last year, more than 20% of new capital committed to third-party litigation funding deals was for patent litigation, down from nearly 30% the year prior.

Third-party litigation funding is not always problematic. For some, outside funding provides easier access to an expensive legal system. But problems arise when funders are able to influence litigation without revealing themselves.

In most courts, there are no disclosure requirements for funding and ownership arrangements. This means that if you are sued, you likely won’t know whether a litigation investor is responsible, and neither will the judge or jury.

Undisclosed financial arrangements raise basic ethical questions like whether there are conflicts of interest that should require a judge to recuse. Litigation investors have been compared to gamblers at a “patent litigation casino” who are “untethered to any ethical or professional interest in justice generally, and interested solely in payouts.”

Non-transparent funding arrangements also raise national security questions. The Chamber of Commerce Institute for Legal Reform, among others, has highlighted that litigation funding could allow foreign competitors to advance their strategic interests against individuals, companies, and whole industries, using the US judicial system.

Recent developments demonstrate the dangers inherent in litigation investment arrangements.

When a Delaware judge mandated funding disclosure last year, he uncovered related patent infringement cases where the so-called patent owners seemingly were not connected to their patents. The “owners” were approached by litigation investors about assuming liability for patents and using infringement lawsuits as an “investment, just like stocks.”

One “owner” even admitted he hadn’t “really looked over” the patents, and the judge remarked that the cases have to give pause to anyone concerned about “the abuse of our courts.”

In another example, the food distributor Sysco recently sued its own third-party funder, Burford Capital, because Burford allegedly prevented Sysco from accepting settlements in Sysco’s antitrust litigation. Burford believed they could get a larger return by continuing the lawsuit. Litigation investors claim to not influence legal strategy, but the Delaware and Sysco cases expose who is actually pulling the strings.

In an era when intellectual property is essential to international competition and national security, patent infringement suits can result in billions of dollars in damages. In addition, over half of US patents are held by foreign entities without a paper trail, and there are no uniform litigation funding transparency requirements. These factors all combine to make a dangerous cocktail.

Complex legal strategies will continue to evolve. In response, we should start with simple, commonsense solutions that both political parties can support. Our patent system needs to make funding disclosure standard.

This poses no threat to good-faith actors, but will expose litigation investors that are weaponizing the US legal system. Without transparency, we are undermining our own economic and national security.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Patrick Leahy was US Senator from Vermont from 1975 to 2023, former Chair of the Senate Judiciary Committee, and Chair of the Judiciary Subcommittee on Intellectual Property in the 117th Congress.

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